EUROPEAN WATER REGULATION: PRESENT AND FUTURE 1 Fabio Tambone Head of International Relations Italian Regulator for Energy and Water (AEEGSI) 2015 Danube

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EUROPEAN WATER REGULATION: PRESENT AND FUTURE

Fabio TamboneHead of International Relations Italian Regulator for Energy and Water (AEEGSI)

2015 Danube Water Conference Vienna, 6 May 2015

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Table of contents

Water Regulatory Framework in Italy (slides 3-4)WAREG creation (slides 5-16)

ANNEXa. WAREG Institutional Working Group survey on institutional

frameworks (18-24)b. WAREG Institutional Working Group survey on public

consultation practices (26-28)c. WAREG Technical Working Group survey on tariff structure

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BENEFITS FROM INDEPENDENT REGULATION

Define a clear and stable normative environment, necessary for attracting investment in the water and wastewater sector

Provide incentives for water utilities to increase efficiency in network operations and maintenance

Ensure that operators efficiencies are passed on to the customer

Ensure technical and commercial quality standards for water and wastewater services

Collect economic-financial information from local authorities and operators

Enforce regulatory decisions: inspections, sanctions, infringement procedures

Best practices of regulatory independence already experienced in regulation of electricity and gas networks in the EU, since the 1990s

WHY STARTING REGULATORY COOPERATION IN EUROPE?

Benchmarking of economic regulation of public utility services in Europe has been a constant and fruitful practice of Regulatory Bodies, in several sectors (energy, transports, telecoms, etc.)

Regulatory cooperation project initially proposed by the Italian Regulator (AEEGSI) and Portuguese Regulator (ERSAR), in 2013

Some advantages of cooperation: learning principles and exchange best regulatory practices (i.e. universal access, efficiency, continuity and quality of service, etc.)

From bilateral meetings and informal talks held in 2013 and 2014, a group of Regulatory Bodies in Europe showed interest and committed in starting WAREG

WAREG CREATION AND CONSOLIDATION

1st meeting in Milan (23 April 2014), hosted by AEEGSI (Italy): 12 Members adopted paper on WAREG creation, defining common principles of cooperation and setting up an «Informal» Secretariat for coordination

2nd meeting in Lisbon (23 September 2014), hosted by ERSAR (Portugal): accepted 6 new Members and 1 Observer, adopted an Action Plan and created 2 Working Groups (Institutional WG, Technical-Regulatory WG)

3rd meeting in Dublin (26 January 2015), hosted by CER (Ireland): adopted Internal Rules, formalized the organizational structure (Assembly, President/Vice-President, Secretariat, WGs), endorsed 4 pilot projects to be carried out by WGs

4th and 5th meeting to be held in Edinburgh (May 2015), hosted by WICS (Scotland) and Budapest, hosted by Hungarian Energy and Public Utiltity Authority

WAREG TODAY: 18 MEMBERS, 1 OBSERVER

AEEGSI – Italy, Regulatory Authority for Electricity Gas and Water

ANRSC – Romania, Romanian Authority for Public Services

CER – Ireland, Commission for Energy Regulation

ECA – Estonia, Estonian Competition Authority

ERRU – Albania, Water Regulatory Authority

ERSAR – Portugal, Water and Waste Services Regulation Authority

ERSARA – Portugal, Water and Waste Services Regulation Authority of Azores

HEPURA – Hungary, Hungarian Energy and Public Utility Regulatory Authority

MAGRAMA – Spain, Ministry of Agriculture, Food and Environment

MRA – Malta, Malta Resources Authority

NCC – Lithuania, National Commission for Energy Control and Prices

NIAUR – Northern Ireland Utility Regulation Authority

KSST – Denmark, Danish Competition and Consumer Authority

PUC – Latvia, Public Utilities Commission

SEWRC – Bulgaria, State Energy and Water Regulatory Commission

SSW – Greece, Special Secretariat for Water

VMM – Belgium, Flemish Environment Agency

WICS – Scotland, Water Industry Commission for Scotland

OFWAT – England & Wales, Water Services Regulation Authority (Observer)

WAREG OBJECTIVES

To exchange common practices, information, joint analysis and comparison of existing water sector regulatory models and performance of water utilities

To promote capacity building, organize specialized training, technical assistance, exchange of know-how and experience

To promote best-practice and stable regulation of the water sector at European level for water and waste water services, aimed at supporting the sustainability of the services, adequate infrastructure investment, proper service quality standards and consumer protection

To prepare common positions about regulatory issues at EU level and establish relations with the Institutions of the European Union

To bring the regulators’ view at international level, in institutions and fora (ex. IWA World Water Congress, Lisbon, September 2014)

To conduct an open dialogue with other relevant National, European and International Institutions and organizations

WAREG ORGANIZATION STRUCTURE

WAREG official bodies established by internal rules approved by consensus:

• ASSEMBLY (strategic orientation, decisions by consensus)

• PRESIDENT AND VICE-PRESIDENT (external relations, to be nominated soon)

• INSTITUTIONAL WORKING GROUP (Co-Chairs: Romania, Spain)

• TECHNICAL WORKING GROUP (Co-Chairs: Latvia, Scotland)

Open membership and observership status, for Regulatory bodies in European countries (EU and neighbours)

WAREG: CURRENT AND PLANNED ACTIVITIES

• ASSEMBLY meetings outcomes: - Action Plan document for 2014-’15 (to be updated every year, rolling)- Organizational structure- Internal rules (to date 3 assemblies, next in Scotland end of May)

WORKING GROUPS meetings outcomes: questionnaires approved and distributed, as a basic tool to collect information from individual Members and draft for 4 reports, by 2015:1. Benchmarking the tariff structure (TECH WG)2. Benchmarking Institutional Regulatory Frameworks (INS WG)3. Customer engagement and Consultation (INS WG)4. Performance indicators (REG WG)

SECRETARIAT meetings outcomes:- Internal strategy and coordination, Assembly and WGs agendas and meetings- Summary tables of sector governance and regulatory framework in each Member- Support in developing Working Groups’ projects- Official logo and Members’ internal web platform

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1st meeting of WAREG Working Groups (13 November 2014 by MAGRAMA, Madrid). 2 Working Groups were created and 4 surveys projected:

Additionally, 2 summary tables on regulatory framework and sector description completed by each WAREG Member: once completed with all EU regulators it will become the first outlook on EU Water regulation and sector in Europe.

• INSTITUTIONAL WORKING GROUP (INS WG): o survey on institutional regulatory frameworks as priority

for 2015, split into 2 parts: institutional setting, role & mandate (1st half 2015), internal organization, accountability mechanisms (2nd half 2015)

o survey on customer engagement and public consultation practices, in cooperation with Católica Lisbon School of Business and Economics.

• TECHNICAL WORKING GROUP (TECH WG): o survey on tariff design as priority for 2015, split into 2 parts:

tariff structure (1st half 2015), tariff methodologies (2nd half 2015)

o survey on technical benchmarking

WAREG WORKING GROUPS

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A questionnaire based on the following 5 sections:

o Institutional settings

o Mandates and roles

o Internal organisation

o Accountability mechanisms

o Tools and mechanisms to ensure regulatory quality

The first report refers to the 2 first sections. A second report (2nd half of 2015) will focus on the 3 other sections

The survey aims at describing institutional arrangements in use and evaluate whether and how independence of regulatory authorities affects efficiency of economic regulation

INS WG: SURVEY ON INSTITUTIONAL FRAMEWORKS

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Framework:

Project concluded in a collaboration between WAREG, ERSAR andCatólica Lisbon School of Business and Economics, coordinated by INS WG

Goals:

Highlight and compare consultation practices in water services regulatory authorities

Produce Guidelines with practical relevance than can be a source of useful information for regulatory authorities

Actions taken:

14 WAREG regulators took part in a survey about public consultation practices / a survey was made to citizens in Portugal to understand their views and opinions about public consultation

Draft report available, including a guide for implementing sound public consultation practices

INS WG: SURVEY ON PUBLIC CONSULTATION PRACTICES

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The Technical Working Group is now focusing on a tariff project. The two components of the project consist of:

Part 1: Benchmarking tariff principles and structure, processes for tariff approval, exemptions/discounts and practical examples of tariffs (ON GOING)

Part 2: Review of the different methodologies to set prices (e.g. revenue/price caps, cost plus, incentive based regulation) – SECOND HALF 2015

The Technical Working Group will discuss the establishment of a Special Task force on performance benchmarking

The scope of the work could potentially involve comparative assessment of the quality indicators, assets and costs. – STARTING WITHIN 2015

TECH WG: SURVEYS ON TARIFF STRUCTURE AND METHODS

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In the 3rd WAREG Assembly meeting (Dublin, 26 January 2015) agreed to carry on relations with :

1. European Commission and Parliament2. Water sector stakeholders: Industry associations (eg.

EUREAU), financial community, academic and research world

3. International organizations and regulatory associations (IWA, World Bank, ERRA, etc.)

EXTERNAL RELATIONS

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Table of contents





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Core services can be offered separately or in an integrated way by operators (abstraction, conveyance and distribution of water for civil usages, sewerage and wastewater treatment)

Water services operators are mostly owned by public entities (municipalities, associations of municipalities or other local public authorities) or by a single national supplier, although fully private operators are emerging

Water infrastructures are owned by local municipalities or by the State, though in some cases of private infrastructures exist

Regulation bodies created by law between 1996 and 2012, generated an increase in water and service quality levels, in supplied customers, in infrastructure investment by operators

Competition is generally not very developed

Environmental quality of water resource and sanitation are typically carried out by line Ministries and they are not included in regulatory competences, with a few exceptions

INS WG SURVEY: MAIN FEATURES OF WATER SECTOR GOVERNANCE

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It has been possible to identify 3 groups of Regulators, according to the nature of their competences:

1. group of independent Regulators (13 Members)

2. group of governmental Agencies/ministerial Departments (3 Members)

3. group of competition Authorities (2 Members)

MAIN FEATURES OF REGULATORY FRAMEWORKS

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9 Members are multi-sector regulators (with competences also on: drinking water, electricity, gas, renewable energy, district-heating, solid waste management, public illumination, public transportation, post, railway), while 4 Members regulate exclusively water service

Features of independence mostly relevant for all 13 independent regulators:

o Nomination of the President and the Board by the Parliament

o Power to dismiss President or Board Members attributed to the Parliament or inexistent

o Duration of the Board mandate beyond duration of Parliamentary legislature (or rolling), not renewable or renewable only once, provisions against conflict of interest of the Board (during the mandate and after)

o Revenues from regulated companies, independent from State budget

o Binding decisions, that can be overturned only by Courts

o No direct or indirect orders by the Government or operators

GROUP OF INDEPENDENT REGULATORS (1)

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Main duties and objectives of independent Regulators group, provided by founding laws:

o Promote cost-efficiency of services provided by operators

o Ensure economic and financial sustainability of services provided by operators

o Ensure universal access to water resource

o Guarantee adequate technical and commercial quality

o Ensure reliable and secure water services, at affordable prices for consumers

o Protect vulnerable customers

o Promote competition in the regulated sectors


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Main powers within the group of independent regulators:

o Tariff setting (set and/or approve tariffs, prices or methodologies for tariff calculation)

o Licensing (issue, modify, suspend or withdraw licenses or authorizations for operators)

o Enforcement (operators data collection, monitor compliance, fines)

o Setting and monitoring quality standards (performance indicators, commercial and/or environmental quality standards)

o Disputes settlement (i.e. receive complaints)

o Advise Government and Parliament


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Power to advise Government on:

o development and implementation of public service obligations

o general framework for tariff approval

o investment plans in water distribution networks

o cost structure, accounting rules, pricing of water services

o standard systems for sustainable water use

o strategic planning for water resources protection and management

o quality of rivers

o monitoring implementation of Water Framework Directive 2000/60/EC, Floods Directive 2007/60/EC, Marine Strategy Directive 2008/56/EC

Tariffs are approved at regional or local municipality level

Drinking water and wastewater services are managed directly by local municipalities or by utilities fully or partially owned by local municipalities

No single pricing policy at national level, but prices are monitored by ad hoc regional entities

GROUP OF GOVERNMENTAL AGENCIES/MINISTERIAL DEPARTMENTS

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In 2 cases, competition Authorities supervise the water and wastewater sector, within the Ministry of Economy or Industry (and also the following other sectors: competition, fuel, electricity and gas, district heating, railways, postal communication, airports)

In 1 case, tariffs are set by the Ministry of Environment, while in another case, the competition authority is responsible for establishing regulation and setting temporary prices for water services

Competences provided in founding law are:

o guarantee environmental and health quality, and security of services

o promote efficiency in the sector

o ensure separation of management and ownership in regulated water companies

o handle complaints by customers

GROUP OF COMPETITION AUTHORITIES

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General perceptions of citizens:

They are not aware of the concept of public consultation

They have a perception that they are not being informed of ongoing public consultations

They consider that the consultation should be done while there is still space for influencing the decision

They believe it is very important that they are involved in the evaluation of the consultation process

They consider that information and feedback is fundamental at every stage of the consultation, especially by publicly justifying the options taken

SURVEY ON PUBLIC CONSULTATION PRACTICES

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Other practices of regulators:

The majority of regulators has a practice of justifying the acceptance/rejection of comments received

The majority of regulators refers that they have a practice of explaining the technical language of the documents

The majority of regulators does not have a standardized practice to monitor the quality of the consultation process

SURVEY ON PUBLIC CONSULTATION PRACTICES

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Based on good practices identified in the survey to regulators

Purpose of creating a solid framework and supporting regulators in public consultation practices

Public consultation principles

Integrity

Transparency

Commitment

Accessibility

Inclusivity

Confidentiality

GUIDE FOR GOOD PRACTICES IN PUBLIC CONSULTATION

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Use of questionnaire/survey to benchmark different regulatory models and tools

WG’s periodic meetings Workshops and conferences across industry stakeholders (e.g.

Regulators, companies, investors)

Some of the tools that the Working Group will be using include:

TECHNICAL WORKING GROUP

Tariffs and price setting

methodology

Customers

Industry & investors

Environment

Sustainable chargesIncreasing quality performanceCost reflective AffordabilityQuality

Recover costsPredictability and stabilityAppropriate maintenance of assets

Protecting environment and incentivizing an efficient use of water resources

Tariff and Price methodology sit at the core of the regulatory functions and involve three major stakeholders:

PURPOSE OF A WORK ON TARIFFS AND PRICE METHODOLOGY

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What is the purpose for having a strong regulatory regime and a robust tariff methodology in the water industry?

Companies/operators should be able to recover all costs and plan investments in a sustainable manner

Prices should be affordable, broadly cost reflective and transparent to customers

Stable and predictable regulatory regime, thus allowing companies to make long term optimal investment decisions and minimising the cost of raising capital

Risks should be equally allocated between customers, the industry and investors

Drive new efficiencies

PURPOSE OF A WORK ON TARIFFS AND PRICE METHODOLOGY

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Most countries have a highly fragmented tariff structure. Very few countries/regions have an averaged price across all the area served

Many countries have put in place exemptions, discounts and/or do some affordability checks (e.g. water charges should not exceed a threshold of disposable income)

Metering has been introduced in all WAREG countries for non-domestic customers

SOME COMMON FEATURES

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Where a water regulator has been established, there is a wide range of different tariff methodologies and regulatory models developed

Price/revenue cap (ex ante)

Setting a rate of return

Incentive based regulation sets a maximum level of revenue or price increase minus an X efficiency factor. It provides strong incentives for company’s to ‘outperform’

Setting a maximum rate of return to monitor profitability and financial strength

Yardstick competition

Comparative efficiency assessment of the costs recognised and performance targets to further incentivise performance

Revenue/price cap (ex post)

Set a maximum amount of revenue that can be recovered based on actual costs. A matrix approach may accommodate different investment requirements

Hybrid Combinations of the above

REGULATORY MODELS

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Thank you for your attention!

Documents

EUROPEAN WATER REGULATION: PRESENT AND FUTURE 1 Fabio Tambone Head of International Relations Italian Regulator for Energy and Water (AEEGSI) 2015 Danube